RBI Rate Hike Cycle Likely as Inflation Rises; Repo Rate May Move Towards 6.5%

The Reserve Bank of India is expected to begin a rate‑hike cycle as headline inflation and wholesale price inflation accelerate, with the policy repo likely to move closer to 6.5 per cent, a report said on Tuesday. The report from Systematix Group states the early-October MPC meeting may show the first signs of such a pivot from the central bank. "The RBI's current position of keeping the rate at 5.25 per cent as long as possible looks increasingly out of step with the inflation trajectory," the report said.

Inflation is expected to sustain its rise, potentially crossing 6 per cent by October-November, driven by the feedback loop from elevated WPI inflation. El Nino-related effects on food supply and persistently elevated crude oil prices point to further upside risk for India's inflation trajectory Headline consumer price index inflation rose to 4.82 per cent in August from 4.45 per cent in July, marking the highest reading under the new series and the third consecutive month above the RBI's 4 per cent target midpoint.

Food inflation rose to 5.95 per cent from 5.52 per cent, with rural inflation at 5.23 per cent outpacing urban inflation at 4.31 per cent. In rural areas, food inflation was even sharper at 6.13 per cent. Wholesale price inflation also inched higher, rising to 9.92 per cent in August from 9.78 per cent in July. "Food prices remain the dominant pressure point across both indices, particularly certain vegetables and spices.

Beyond food, elevated fuel and energy costs linked to global factors, especially developments in West Asia, along with rising manufactured and input costs, are broadening the base of price pressures," said Dhananjay Sinha - CEO & Co-Head, Institutional Equities, Systematix Group Within CPI, other notable contributors included personal care, social protection and miscellaneous items. Restaurants and accommodation services, alongside select transport-related items, contributed significantly, while core inflation also edged up to 4.2 per cent, the report noted.

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